Later this year a new 'failure to prevent' offence will be added to the potential corporate crime charge sheet.
The Criminal Finances Bill 2016 (when enacted) will create the corporate crime of failure to prevent the criminal facilitation of tax evasion. The bill is modelled in large part on the Bribery Act 2010 and the corporate offence of failure to prevent bribery.
Law firms and others will be liable for the actions of their employees and other 'associated persons' who intentionally facilitate tax evasion. The offence is strict liability, subject to the defence of having in place reasonable prevention procedures (or showing that it was reasonable not to have had such procedures at the time the offence was committed).
Two new offences
The legislation will create two new offences. The first will apply to all businesses, wherever located, in respect of the facilitation of UK tax evasion. The second will apply to businesses with a UK connection in respect of the facilitation of non-UK tax evasion.
The offences will apply to both companies and partnerships. They will effectively make a business vicariously liable for the criminal acts of its employees and other persons 'associated' with it, even if the senior management of the business was not involved or aware of what was going on. The definition of associated person is extremely wide, and entities howsoever structured will be regarded as a single entity for the purposes of prosecuting the offence.
In relation to UK tax, the offence will apply to any company or partnership, wherever it is formed or operates.
Where non-UK tax is evaded, a business will commit an offence if the facilitation involves a UK company or partnership, any company or partnership with a place of business in the UK (including a branch), or if any part of the facilitation takes place in the UK. In addition, the foreign tax evasion and facilitation must amount to an offence in the local jurisdiction.
This is a strict liability offence. A business will have a defence if it can prove it had put in place reasonable prevention procedures to prevent the facilitation of tax evasion taking place (or that it was not reasonable in the circumstances to expect there to be procedures in place).
Six guiding principles
HMRC published draft guidance in October 2016. The guidance is formulated around six guiding principles for the prevention procedures that businesses should put in place:
- Risk assessment: a business assesses the nature and extent of its exposure to the risk of those who act for or on its behalf.
- Proportionality: risk-based prevention procedures will depend on the levels of control and supervision that a business is able to exercise over a person acting on its behalf and the proximity of that person.
- Top level commitment: senior management should be committed to prevention and should foster a culture in facilitation of tax evasion is never acceptable.
- Due diligence: procedures should take an appropriate and risk-based approach.
- Communication (including training): prevention policies and procedures are communicated throughout the business.
- Monitoring and review: the business monitors and reviews prevention procedures and makes improvements where necessary.
In the event of a facilitation offence taking place, it is a defence for a business to show that either reasonable prevention procedures were in place to prevent the facilitation by the associated person or that it was reasonable not to establish additional procedures at the time the offence was committed. A conviction could lead to an unlimited fine and orders for confiscation of assets.
The bill does not define reasonable prevention procedures but it does require the chancellor to publish guidance about procedures that relevant bodies can put in place to prevent persons acting in the capacity of an associated person from committing UK tax evasion facilitation offences or foreign tax evasion facilitation offences.
The bill allows the chancellor to approve guidance prepared and published by others.
Preparing sector-specific guidance
The Law Society is liaising closely with the BBA and ICAEW on the preparation of sector-specific guidance. At this stage we envisage all three sector bodies would be seeking HMRC endorsement of their respective guidance.
HMRC has agreed to produce a Law Society webinar on the new offence and we are arranging a meeting for City MLROs at which HMRC will be speaking. HMRC has already indicated that relying on the existing Bribery Act or AML policies and procedures is unlikely to be sufficient for the purposes of establishing reasonable prevention procedures.
Law firms will need to consider undertaking a risk assessment, designing appropriate policies and procedures and implementing a communications programme and training, to minimise the risk of the offence being committed in the first place, and to maximise the chances of mounting a 'reasonable prevention procedures' defence successfully.
These steps will be significantly more complicated for firms which operate internationally, either as UK headquartered businesses or as UK 'permanent establishments' of non-UK headquartered businesses.
A non-UK parent carrying on business through a UK branch or permanent establishment would be in scope for both the corporate offence related to UK tax and for the foreign tax offence. This extremely broad jurisdictional scope means that any overseas-headquartered firm which carries on part of the business in the UK should consider putting in place procedures to prevent the facilitation of tax evasion across all its international business operations.
Corporate offence of failure to prevent tax evasion
There are three elements to the new offence which are summarised in the updated HMRC guidance (October 2016):
Stage one: The criminal tax evasion by a taxpayer
Stage two: The criminal facilitation of this offence by an associated person acting on behalf of the business
Stage three: The company failed to prevent the associated person from committing the criminal act at stage two.
Defence: It is a defence for the relevant body to have put in place at the time of the facilitation offence being committed 'reasonable prevention procedures' to prevent its associated persons from committing tax evasion facilitation offences (at stage two) (or it was unreasonable to expect such procedures to have been put in place).
Foreign tax evasion offence
The foreign tax evasion facilitation offence requires 'dual criminality':
- the actions of the taxpayer (stage one above) and the associated person (stage two above ) must be a tax evasion offence under UK law, and
- the overseas jurisdiction has equivalent offences at both the taxpayer and facilitator level.